Deflation risk

Both the chief economist of the OECD, Pier Carlo Padoan, and the managing director of the International Monetary Fund, Christine Lagarde, have described the possibility of prices starting to fall as one of the most serious threats to the global economic recovery.

“With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively,” Ms Lagarde said.

Here are some figures I found for inflation – CPI and Current harmonised inflation. Eyeballing that data it appears that high-income economies do have very low rates of inflation.

Unfortunately Australia is not included in that list. The ABS put our latest inflation rate at 2.3% (sa). David Uren reports on the expected inflation rate (to be released on Wednesday):

The headline figure may be closer to 2.7 per cent, reflecting the influence of high fruit and vegetable prices and the influence of the fall in the dollar.

To be sure that remains within the RBA 2% – 3% target band, but it is well above the levels of many other high-income economies.

68 Responses to Deflation risk

If deflation stops consumers from spending now, due to the expectation of falling prices in future, then why does anybody ever buy, or upgrade, a computer? Why do companies invest in plant and equipment to produce lower-cost goods, when surely that price deflation must drive customers away?

Where deflation does become an issue is pervasive property deflation – frightens the shit out of banks. But they will never admit that reflationary policy is just making people pay more so that banks are happier.

A leftist MD of the IMF bemoaning that good old fashioned inflation will not dig European economies out of their muddle. She certainly has a two dimensional grasp of economics: who can I tax and when can I start.

Another stupid comment by Token. Abbott deserves no credit for the current state of the Australian economy. Rudd and Gillard steered us away from recession during the biggest global economic downturn since the 1930s depression.

I was involved in an online debate of inflation vs deflation…ostensibly in the context of Bitcoin…but drifting off topic.

Anyway, I don’t claim to know for sure if deflation is the ogre or not, but the hysteria which surrounds it makes me believe there is soemthing amiss. The way I see it, we all know currency increase/decrease creates winners and losers. Neither is ‘good’ or ‘bad’ inherently. Each person will see the good/bad depending on whether they are a net importer or exporter.

Now. With deflation / inflation, we must have the same thing, right? A set of winners, and a set of losers. The hysteria must come from the losers. Are the losers the financial sector and the governments?

Two things I note, the first having already been covered : why does anyone buy anything
, when the price of most things fall over time? Second, while it is possible (and many examples abound) for prices to go to infinity with inflation, it’s not possible for prices to go to zero.

The problem is obviously the stickiness of wages, but if people find that their hours can buy the same amount of stuff as before,surely that is not insurmountable? People seem to be able to move to other countries and suffer a numerical drop in income, but remain happy because their purchasing power is maintained? Ie, move to the UK and you get deflation in the numeric amount of your salary. But your salary has got buying power, so you adjust fine. It seems like a small issue compared to constantly having the purchasing power of your wage and savings eroded.

Anyway, over to the learned..is deflation really as scary as it is made out? Isn’t the natural state of the world mild deflation, through increased productivity?

If anyone got owned it’s you, Sinclair, by the reality of the last two or three years since that silly stagflation article. You are trying valiantly to defend it by claiming that an inflation range which is precisely in the middle of the RBA’s target range is “high”, and an economy which is growing at historical trend rates is “stagnant”. You are wrong, plain and simple.

If you are prepared to deny reality like this, I suppose, you’ll think anything.

Henry Thornton has the unofficial unemployment rate at 11.2%, and with underemloyment added it rises to about the 20% mark. I have a feeling that the economy showed little growth in the last six months. So where are we headed?

and an economy which is growing at historical trend rates is “stagnant”

At the risk of feeding the Iunctarete molestia donuticus, when did trend employed persons last contract for 8 consecutive months? Presumably it’s waiting until Senior Labor Figures announce that enough time has expired since the R-G-R govt to flip the switch from “economic miracle” to “heading for Armageddon” before acknowledging the true state of the economy. I also cite Exhibit B, the GDP disaster.

It is difficult to see a sustained period of real (as opposed to measured by current ABS measures) deflation in Australia unless there is a radical deregulation of the labour market – hard to imagine under this or any likely future federal Government. Aside from periodic (weather-related etc.) changes in food prices, the only consistent falls (if any) that ever seem to occur in prices are for imported goods – i.e. goods which have a relatively limited Australian labour cost added to them before they reach the consumer. Baldrick’s comment at 10.52am about costs from government and government sponsored utilities is very pertinent here, but I equally have trouble thinking of any non-imported goods/services I purchase from the private sector which have fallen in price in recent years. About as (un)likely as radical labour market deregulation are deliberate measures to reduce appreciably – rather than, at best, constrain – increases in property prices. That would be the only other source I could see for real deflation in Australia.

Rudd and Gillard steered us away from recession during the biggest global economic downturn since the 1930s depression.

And again, for the sake of getting it on record, the GFC extended from Feb 9th (our time) 2007 with the collapse of funding to largest subprime lender New Century (and consequent plunge in the ABX index to levels that renders effectively all sub-prime CDOs worthless until mid Feb 2009 when credit markets recovered and stocks began their bull market.

What “steering” did the Goose undertake during that period? With the US economy shrinking, he declared inflation the greatest moral hazard for our economy and announced an austerity Budget in May 2008. He was apparently oblivious to the failure of Bear Stearns and to the Fed’s announcement of stimulus to avoid deflation. He then pissed on the Opposition’s calls for deposit guarantees. To summarise his steering:
- Yes to austerity
- No to deposit guarantees.

Then even the hapless Ken Henry decided it was time for Goose to go. He was sat in the naughty corner while the people with some economics training put the deposit guarantees in place after the rest of the world had them and while the Goose’s refusal to do the obvious caused a run on our banks. He then claimed credit for the idea.

There was a trivially small stimulus, well under 1% of GDP. It did nothing.

Then the GFC ended.

What “steering” occurred duringthe GFC that I was unaware of?

Some months later, with the GFC over, the Spain-Goose stimulus package marked the first ALP-specific economic policy implementation. (The LNP supported the amount of stimulus for 2009, but not the form, and not the proposal for the 2 out years.) How well did that go? Remind me what a great success it was again? Our unemployment is, like the EU’s, worse than it was when the GFC ended. How many countries / what % of the world’s population does this apply to? What % of those are net commodity exporters, during the greatest commodity boom of our lives?

I think when people talk about the deflation ogre they are pretty clearly talking about more than the natural reduction in the real price of goods and services resulting from increased productivity. What I don’t get is why there is the fear. If Japan is the scary story then the cause of their problem isn’t lacking for diagnosis and explanation.

Greece has negative CPI, presumably as domestic services fall in EUR terms (as the unemployed people offer their services at lower cost after the catastrophic stimulus experiment caused Great Depression in the Eurozone). Greece is the last economy left in falling CPI – the PIIS have returned to marginal positive CPI as has non-EUR Europe.

Deflation is a monetary problem caused by an increase in the value of money and manifesting itself in a sustained decrease in the price level. Now I’m happy to believe that the Greek economy is in decline and the value of its goods and services shrinking – but this isn’t due to an increase in the value of the currency.

The confusion arises because people have began to define the problem by its symptoms and not the cause. Increasing or decreasing prices are not problematic in and of themselves if they are caused by changes in relative prices (due, for example, to increases in technology/productivity or shortages etc).

@ Jim Rose – interaction with the nominal thresholds in the tax system? Increased price variance overall? I’ve never quite understood some “commentators” (Kohler being an example)’ obsession with opposition to slight reductions in the price level; it was a fairly common experience pre 1945, and is something that should be borne in mind in considering pre-war “inflation”. It was also the “economic” interpretation of Menzies’ ’49 campaign platform of “putting value back into the pound”. Like most governments, he defaulted.

“Deflation is a monetary problem caused by an increase in the value of money and manifesting itself in a sustained decrease in the price level. Now I’m happy to believe that the Greek economy is in decline and the value of its goods and services shrinking – but this isn’t due to an increase in the value of the currency.”

Well, the increase in the value of the Euro measured against greek goods and services is caused by a decline on the supply-side of the goods and services.

However, there are really two questions:

1 Is deflation an ogre if it exists.

2 Is there are reason to be worried about deflation occuring at ogre-levels.

You can’t believe in supply and demand and not think that deflation could be an economic problem. But the existence of that problem is a result of central bank choices.

In the early 1980s, Tom Sargent wrote two essays on stopping hyperinflations in the 1920s and stopping moderate inflations such as under Thatcher and in France in 1926.

Both essays showed that high inflation could be stopped quickly with few adverse employment effects if there was a credible fiscal consolidation as well. Rapid deflation is possible with few adverse effects.

I had a listen to you speak one day, you stumbling mumbling farkin halfwit..yibbba yibbaa, you manage to turn what should be a simple sentence comment into 5 minutes of farkin agony, actually, for the sake of us all stick to twitter.

Oh Noes, is it possible you made a mistake? Perhaps you were busy twittering that day? Not that you cared who won the election, right?

You really are a fat little cunnie, if you managed to remove shortens pecker from your mouth for a couple of minutes perhaps you could get some fresh air and smell the roses.

You ever see the show corky Monty?

I had a listen to you speak one day, you stumbling mumbling halfwit..yibbba yibbaa, you manage to turn what should be a simple sentence comment into 5 minutes of agony, actually, for the sake of us all stick to twitter.

The confusion arises because people have began to define the problem by its symptoms and not the cause. Increasing or decreasing prices are not problematic in and of themselves if they are caused by changes in relative prices (due, for example, to increases in technology/productivity or shortages etc).

Taking the more conventional definition of deflation as a fall in the general price level, is there an example since 1930 of deflation restoring (or coming close to restoring) full employment? Sargent’s piece deals with disinflation, not deflation so defined; the only example that springs to mind is the Premiers Plan, the rather peculiar simultaneous adjustment of loans, rents, wages and prices.

Liberty Quotes

The propensity to blame skeptics and fossil fuel companies for the serial political failures of the environmental movement should be understood as a tribal defense of the collective green ego, not the logical conclusion of a dispassionate analysis.— Ted Nordhaus and Michael Shellenberger